Oxford Lane Capital Corp. 6.75% Notes due 2031 (OXLCL) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Oxford Lane Third Fiscal Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jonathan Cohen, CEO. Please go ahead, sir.

Thanks very much. Good morning and welcome everyone to the Oxford Lane Capital Corp. third quarter fiscal 2016 earnings conference call. I'm joined today by Saul Rosenthal our President and Bruce Rubin our Chief Financial Officer and Treasurer. Bruce, could you open the call today, with the discussion regarding forward-looking statements?

Sure, Jonathan. Today's call is being recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was released earlier this morning. Please note that this call is the property of Oxford Lane Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. I'd also like to call your attention to the customary disclosure in our press release this morning regarding forward-looking information. Today's conference call includes forward-looking statements and projections and we ask that you refer to our most recent filings at the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings please visit our website at www.oxlc.com. With that I'll turn the presentation back to Jonathan.

Thanks, Bruce. For the quarter ended December 31, 2015 Oxford Lane Capital Corp. recorded GAAP total investment income of approximately $16 million, representing an increase of approximately $1.5 million when compared to the quarter ended September 30, 2015. That increase primarily represents an increase in GAAP income recorded on our CLO equity investments. The December quarter's GAAP income from our portfolio was generated as follows; approximately $15.5 million from our CLO equity investments; approximately $200,000 from our CLO debt investments; and approximately $300,000 from all other income sources. Oxford Lane also reported GAAP net investment income of approximately $8.2 million or $0.46 per common share for the quarter ended December 31, 2015 compared with the prior quarter's $5.9 million or $0.33 per share. The increase in GAAP net investment income for the quarter was primarily driven by increased effective yields income projections on purchases of CLO equity vehicles. As of December 31, 2015 the following weighted average yields were calculated. The weighted average GAAP yield of our CLO debt investments at current cost was approximately 9.0% compared with 8.2% as of September 30, 2015. The weighted average GAAP effective yield of our CLO equity investments at current cost was approximately 15.4% compared with 13.9% as of September 30, 2015 and the weighted average cash distribution yield of our cash income producing CLO equity investments at current cost was approximately 25.6% compared with 26.6% as of September 30, 2015. We note that the cash yield calculated on our CLO equity investments is based on cash distributions we received or were entitled to receive, at each respective period end and excludes those CLO equity investments which have not yet made their inaugural payments. Our taxable income which we estimate approximates our cash income is substantially higher than our GAAP NII due to the accounting for CLO equity investments under GAAP and for the quarter was estimated at $17.3 million or $0.96 per common share. This estimated distributable net investment income represents that portion of our estimated annual taxable income available for distribution to common shareholders that we estimate to be attributable to the quarter. As previously announced, the Fund's Board of Directors has declared a distribution of $0.60 per common share for each of the quarter March 31 and June 30, 2016 payable on March 31, 2016 to shareholders of record as of March 16, 2016. Distributions payable June 30, 2016 to stockholders of record as of June 16, 2016. Additionally the Board has declared the required monthly dividend of approximately $0.16 and $0.17 respectively for our Series 2023 and 2024 term preferred shares each payable on March 31, 2016, April 29, 2016, and May 31, 2016. For the quarter ended December 31, 2015 we also recorded net realized losses of approximately $4.1 million or $0.23 per share and net unrealized depreciation of approximately $51 million as our CLO position experienced significant price declines during the quarter. As a result of those realized and unrealized losses, we had a net decrease in net assets resulting from operations of approximately $46.9 million or $2.66 per share for the quarter. We note that each of our CLO equity positions held during the quarter produced full equity distributions to us and that no equity payment was diverted during the quarter. At December 31, 2015 our net asset value per share stood at $8.13 compared with a net asset value at September 30, 2015 of $11.33. During the quarter ended September 31, we made additional investments totaling approximately $49.8 million. Those additional investments consisted of positions in CLO equity tranches. Also during the same quarter, we recognized portfolio of exits in approximately $51 million from sales of our investments. Portfolio exits consisted of approximately $30 million in repayments of warehouse facilities and approximately $21 million of sales from CLO equity investments. With that, I'd like to turn the call over to Deep Maji for a brief discussion on market conditions. Deep?

Thank you. During the quarter ended December 31, 2015 price declines persisted indicate a corporate loan market. The continued weakness across the commodity sectors coupled with credit issues in other sectors continue to lay on market sentiment. The S&P/LSTA leverage loan index closed at 91.26% on December 31, 2015 compared to 94.21% as of September 30, 2015. As of February 1, 2016, the S&P/LSTA leverage loan index stood at approximately 90.2%. According to S&P, the trailing 12-month leverage loan default rate by number of loans at the end of January 2016 rose to approximately 1.5% from 1.2% at the end of December, the highest level in over 2 years. Against this backdrop, we continued to see a meaningful bifurcation in the loan market as the trust names particularly in the oil and gas sector felt further as the oil prices continued to fall during the quarter. Concurrently, near-term loans experienced weaknesses as well as lower liquidity going to year end and outwards from bank loans ETS and mutual funds persisted in CLO issuance flood. According to Morgan Stanley, the average CLO portfolio price at the end of December was approximately 93, down 1.25 points from the previous month and approximately three points lower than September 2015 levels of 96. Price dispersion also increased across CLO collateral as approximately 15% of loans were trading below 90 and 8% below 80 as of year-end compared to 11% and 5% respectively at the end of September. Consequently [close prices] [ph], CLO equity NAVs were 2.0 equity NAVs dropped approximately 30 points in the fourth quarter of 2015. Wells Fargo estimates that medium NAV for 2013 and 2014 CLOs are now in the single digits and media NAVs for 2012 and 2015 deals with less energy exposure or approximately 20%.

Deep, thanks very much. As NAVs declined for CLO structures during the quarter, we believe this was partially offset as collateral managers were able to selectively take advantage of market technical's to active portfolio management to increase collateral par values. According to LPC data from Wells Fargo, U.S. CLOs still in their reinvestments periods purchased approximately $5.1 billion of new loans in November, the medium price of 99.0 versus $3.4 billion in sales at medium price of 99.3. Consequently and during the quarter, the market continue to see CLO equity tranches traded significant discounts from a cash price perspective. The combination of further to [press] [ph] NAVs, the expectation for an increase in actual defaults and ratings downgrades combined with weakness in the broader markets resulting in CLO equity trading at lower levels which has contributed to lower marks on our CLO equity portfolio as in CLO equity market as a whole. We believe that the continued dislocation in the CLO markets present us with a more compelling investment opportunity set especially if certain CLO equity in debt tranches continue to erode in price. Since we began investing in the CLO market, we have focused on both primary and secondary markets and we varied our emphasis according to which offer better relative value at various times. We continue to deploy our CLO investment strategy where we see opportunities to generate attractive current cash flows and/or the potential for capital depreciation. We continue to focus on longer date at CLO equity with longer reinvestment periods that will have additional time to build far and spread in today's syndicated corporate loan environment. As part of that opportunity and because we've also seen signs, further signs of a similar dislocation CLO given debt markets, we may start to opportunistically increase our exposure to CLO debt tranches as they trade down in a secondary market. We know that additional information about Oxford Lane's second fiscal quarter results has been posted to our website at www.oxlc.com. And with that Operator, we're happy to begin taking any questions.

[Operator Instructions] Our first question will come from [Casey Miller] [ph] of Aegis Capital.

I was just wondering if there is any risk of the preferred dividends being cut or not take? Thank you.

Certainly we haven't made any public comments about the preferred stock dividend and the preferred stock dividends have been declared for the fourth quarters as we've discussed. So no, we don’t have anything on that topic to convey.

Thank you.

Thank you very much.

And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

All right thank you very much Operator. If people have additional questions, they should feel free to call us here and we look forward to speaking to everybody next quarter. Thank you all very much for your interest and for your participation. Thank you.